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Federal Reserve research shows Bitcoin [BTC] futures trade dragged down its prices

Aman Swami



Federal Reserve research shows Bitcoin[BTC] futures trade dragged down it's prices.
Source: Pixabay

Bitcoin surged up to a massive price to nearly $20,000 followed by a decline which was directly tied to the launch of a futures market, according to research from the San Francisco Federal Reserve published on Monday.

Four researchers wrote in the regional Fed bank’s most recent Economic Letter:

“It was not a coincidence to see a rapid run-up and subsequent fall in the price after the introduction of futures. It is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.”

The Chicago Mercantile Exchange [CME] in December 2017  introduced Bitcoin futures trading. With the announcement, surging Bitcoin prices lined up. That same day, Bitcoin hit a high of $19,783. The Chicago Board Options Exchange, or CBOE, also opened a futures market a week earlier but trading there was thin, the letter said.

Researchers added:

“It was extremely difficult, if not impossible, to bet on the decline of bitcoin prices, until futures existed. As optimistic investors continued to bid up, the cryptocurrency rose more than 1,300 percent in 2017.”

Meanwhile, there was no backing for a belief of the pessimists, that the Bitcoin price would collapse.

The researchers said:

“So they were left to wait for their ‘I told you so’ moment. The launch of bitcoin futures allowed pessimists to enter the market, which contributed to the reversal of the bitcoin price dynamics.”

As of today, Bitcoin is trading at half of its pre-futures peak, near $9,293.86.

The researchers compared this price reaction to mortgage-backed securities, which they said hinged on the same driving force of optimistic and pessimistic traders.

They added the reason as to why it was a slow and gradual fall rather than an overnight collapse. They said it could be a lack of attention or willingness to enter the market in the first week of trading.

The San Francisco Federal Reserve research study also showed that as any financial institutions which have a traditional structure become more willing to accept Bitcoin, and official recognition and regulatory acceptance of Bitcoin as a means of payments could help the future prices and demand.

The researchers added:

“These markets tend to be winner-takes-all markets hence opening up  a possibility for competing cryptocurrency to become more widely used which in turn could cause bitcoin to drop precipitously.”

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Aman Swami is an Economics major from Christ University. He is very passionate about cryptocurrency and understanding of financial markets.

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    Tom Servo

    May 10, 2018 at 9:33 AM

    Or, more likely, btc was bid up prior to futures trading by manipulators who accumulated a crap ton, and once they had the ability to short, they market dumped their stack. Since btc exchanges are still incredibly illiquid, these whales could single-handedly force the price way down, profiting off their futures position. If they were actually really smart, they’d have double dipped with some degen 100x shorting on bitmex as the market sold the top.

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